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The evolution of payment strategies for media agency services

Just how much you should pay a media agency is an issue that many marketers struggle with. The area is complex and it's not always obvious just how much agencies are earning through media owner rebates and other forms of income.

The key goal should be to ensure a clear contract in which both sides know exactly what is expected of them and a payment structure that aligns the agency's goals with those of the advertiser who is paying for their services.

The WFA's latest survey of media remuneration strategies highlights a number of changes in the way that advertisers are resolving these issues. It's our first look at this area since 2008 and although the survey only reflects the responses of 27 advertisers, the findings are indicative of the way the world's biggest advertisers are changing the way they pay for media agency services.

Respondents were responsible for nearly $30bn in gross media spend – 41% had global responsibilities, 22% covered Europe, 19% APAC, 11% Latin America and 7% the US and Canada. Changes in the behaviour of WFA members are often a harbinger for the whole market as large multinational brands often have the most sophisticated relationships with their agency partners.

Not all the questions that we asked in 2008 were directly comparable with the 2011 results – feedback in 2008 led us to address some areas in more detail – but where possible we've drawn out the trends in terms of the changing nature of the relationship between advertisers and their media agencies.

The rise of regional In the last three years, we have found greater emphasis on regional rather than country-specific appointments. The proportion of respondents who appoint a media network/group regionally has risen from 23% in 2008 to 36% in 2011. The number of brands making global appointments has not changed since our previous survey and remains at 36%.

As the incredible number of global and regional pitches in 2009/10 has shown, multinationals can change their approach to agency support on a fairly frequent basis. The apparent trend, however, has been towards increased centralisation/consolidation of agency relationships. The largest number, 80% of respondents, however still claim to appoint some agencies on a local basis: this figure remains unchanged from the last survey.

WFA peer group discussions would suggest that this 80% figure is exaggerated by the necessary exceptions where agency partner service levels are not consistent across their entire footprint.

Another potential trend is the apparent increasing propensity for big companies to leverage their scale by buying directly from media owners. Whilst this may appear to be on the increase in some markets – or on certain platforms – only 8% of our respondents claim to take this approach (2/3rd of those doing so on a local market by market basis).

Commission continues to declineA clear shift away from agency commission – offline media remuneration has shifted away from rewarding spend towards rewards for results. Thirty-three per cent of those surveyed now use an element of payment for results such as sales or brand KPIs for offline media buying (the figure is 25% for online). Eighty-two percent of those who use this method as part of the remuneration specify sales as their key KPI.

Breaking down the results for offline media by region we see that, WFA members in APAC are more likely to rely on value-based remuneration than their peers in Europe or LATAM, whereas participants in LATAM are more likely to use fixed or output-based fees than the other regions. Labour-based fees are most commonly used by respondents with responsibility for Europe.

Online media agency remuneration follows a similar pattern to offline, although respondents are more likely to remunerate their agencies via commission or through fixed or output-based fees than with offline.

Measures are now being taken to put greater emphasis on real performance. Elements such as sales or media buying performance now represent an average of more than 20% of total remuneration. Twenty-four percent of those surveyed said it was worth more than 30% of total fees.

Of the vast majority of those surveyed (92% offline and 79% online) who use performance related fees, nearly all used buying cost targets as a metric, with almost 70% also using quality metrics. Service measures rounded off the top three performance KPIs.

Given the number of WFA members focusing on effective integrated marketing communications, and struggling with often-complex agency rosters, it is not surprising to see already 36% of respondents including agency collaboration metrics in their remuneration strategies.

Watching briefMarketers are now assessing the performance of their media agencies far more often. Thirteen per cent of agencies are now assessed more than twice a year. In 2008, no WFA member said they evaluated this frequently. The number of advertisers who formally evaluate performance twice a year is now 57%, while the number who assess delivery just once a year has dropped from 36% to 30%. Whilst it is commonly recognised that there is no "silver bullet” to solving the issue of transparency, most respondents agree the best approach is to use many relevant tactics. Increasingly, this includes the use of financial auditors, armed with a very specific brief.

Whilst pitching is not advocated as a solution to the transparency issue, it is certainly perceived to help provide a meaningful benchmark and, typically, to improve value from the advertisers' perspective.

Barriers to successThe three most commonly cited barriers to achieving the perfect mix of value and performance based remuneration were measurement, transparency and agencies.

In measurement, the most common difficulty was relating media KPIs to business performance. This was exacerbated by the varying quality of metrics being provided (our respondents are seeking measurements in a wide variety of markets and against many different objectives). This lack of reliable data makes benchmarking extremely challenging.

The issue of transparency (and honesty) was raised by many respondents. Examples included media rebates not being returned to the advertisers who's investment had earned them in the first place. Several respondents also questioned whether their agency partners had fully bought into a “transparent framework”. Additionally, media inflation and incentive calculations were two areas where assessments were often seen to be lacking in credibility.

As approaches to agency remuneration continue to evolve, it seems marketers face a continued struggle to reward and remunerate in a manner that aligns their agency partners' goals with their own.